In the United States for instance it is virtually impossible to buy anything in cash even if you have the money. All retailers insist on credit sales preferring to know your credit rating as opposed to accepting cash.

What a load of BULLSHIT - and not the type you can use to improve your crop yields!

Except for purchases over $10,000 (coz of money laundering laws/regulations) it is highly unlikely a retailer is going to refuse 'cash' for any purchase... Heck, why should they say no to good old hard cash?

I challenge the writer to visit a store - electronic, clothing, department store, etc - in the USA & say... I want to pay in cash... Chances are the cashier will smile & say "of course, sir/madam" and take the cash!!!

Retailers do NOT care about your credit history if you are paying cash... after all why should they bother with your credit history if you are PAYING in cash???

As for Eastleigh, it is time some order was brought to bear in the area. I may sound a little un-PC but I am sure there are more than a few al-shabaab sympathizers in Eastleigh. Kenya has an important military installation (the Eastleigh Airbase) around which lots of buildings have not only encroached into the 'safe zone but also high/tall buildings which pose a threat to the aircraft.

So we support President Kibaki in getting rid of corrupt cartels within the Lands Ministry. I would even venture that if he lined some of these corrupt officials up against the wall & had them shot... most Kenyan would cheer!

KES interest rate are 24% & climbing... So it makes sense for some who are willing to take the forex risk to borrow in US$ at much lower rates!

The over-arching theme is that Kenya is dollarizing... Ask your supplier about the following goods or services:

Cars

Computers

Flights (local & international)

Fuel (yep, its a combination of oil prices prices in US$)

And so on and on and on...

Just dollarize... Zimbabwe did it & it has one of the lowest inflation rates in Africa...

** I hope the idea of a common EAC Currency is shelved until ALL the trade barriers are removed between EAC countries... Then merge the Fiscal Policies of all the EAC countries... Otherwise, it will fail... See the travails of the Euro!

*** A 'new' currency based on a /basket/combination of currencies would be a better idea but harder to implement. Some of the candidates for the basket would include US$, Yen, Yuan, Rupee, Euro, Sterling Pound, UAE Dhiram, Uganda Shilling & Tanzania Shilling. These are countries Kenya does substantial business with...

Friday, November 25, 2011

A RANT ON PUBLIC FINANCES

A
quick update on public finances – there’s a treasure trove of data out
there with all sorts of interesting inferences to be made on it.
However, it usually takes an specific event to trigger a search for data
of a specific sort – like say, why projects are stalling and salaries
aren’t being paid.

The Eldoret Correspondent, Matthews
Ndanyi, sent over an interesting tidbit on how infrastructure projects
worth KES 10 B across some 45 Technical Training Institutes have stalled
– because of the funds budgeted for these programs has not been
released.

Another 1.6 B is also missing in action – and
that includes workers wages for between 3-6 months, depending on the
Technical Training Institute in question. The sources for this story are
scared to talk to the media. The KE Govt being the vindictive bastard
that it is [Remember this? -
http://www.youtube.com/watch?v=wGVD3jqvQ70]

So there’s over KES 4 B lying
around in the Higher Education Ministry, and if you crunch the numbers a
little more, it gets more interesting. It’s off target by 24.89% on
recurrent spending, and a massive 60.83% on development expenditure.

The
story’s sources gain credence – and a series of phone calls and text
messages to the Higher Education PS, Chrispus Kiamba, are not responded
to. Classical silent treatment – it’s like dealing with an moody
partner, only one you religiously pay, and get shoddy returns from.

The
thing is, it’s not just the Higher Education chaps that are working at
the speed of racing sloths. Aggregated across all Government Ministries,
development expenditure’s off target by 46.5%. That’s about half of
Uhuru Kenyatta’s highly lauded “investments” not coming on line, and
we’re already halfway into FY ’11-’12.

The Water Ministry,
which was to spearhead part of the much publicized irrigation blitz the
Finance Minister talked about in June, hasn’t touched 54.2% of its
development budget. The other bit of the equation – the Agriculture
Ministry – makes short work of that. 62% of its development budget is
still untouched.

Inference – we’re not bloody serious
about taming inflation beyond 2012. Given these figures, I would not be
surprised if in 2012, we’ll still see the Central Bank Governor
lamenting how food price shocks are making a mess of their efforts to
tame inflation.

Also, one, Uhuru Kenyatta’s paying lip
service to the business of cleaning up public finances and making sure
our taxes go where they’re needed, to do what he claims they should do.

And someone wants me to take this fellow’s pitch for President seriously? Bollocks.

These
books look like some failed Hogwarts experiment. Any private firm worth
its salt would have the CEO & CFO fired for presenting numbers of
this sort – but KE taxpayers being who they are, we either give the CFO
& CEO of Kenya.Inc a free pass, or we bury our heads in the sand and
assume nothing bad’s happening.

In a ruling this week, Judge Mohammed Warsame described the Government as follows.

“….the
government monster in the name of security ought to be investigated and
tamed otherwise it may run amok and cause more suffering to the
citizens of this country….”

He was talking
about the demolition of buildings in Eastleigh, but his words apply to
the state of public finances as much as anything else.

This
monster, must be brought to heel – but if you’re going to bet on
anything, bet on KE taxpayers joyfully casting their ballot for more
terrible financial managers in 2012.

As you know (see prior blogpost here) Interest Rates have jumped to 24% or higher for many Borrowers including OMCs. What a pity the ERC is playing populist politics...

The energy sector regulator, however, declined to give an indication of the margin by which the next adjustment will increase fuel costs, saying the oil marketers “will not be allowed to pass on the lending cost increases in full.”

So who bears the cost???

So whereas Banks (some whose owners/shareholders are either powerful politicians or very well connected) are not under any sort of Price Control regime... Basically, the populist Mandarins at the ERC are saying... "Let the banks make super-profits"

8-10% spreads over CBR

Spreads of 1-5% for forex

but we want you the (legitimate) risk-taking OMC who invests billions in infrastructure to go BROKE... Of course, the Briefcase Dealers are doing a-OK...

As I have argued in the past, many OMCs will STOP importing fuel for the Wholesale Sector. A consevative OMC will import only that product/s it can quickly move through its own sales channel without giving/extending credit to anyone.

The (competitive) Free Market will be killed off as many smaller retailers rely on credit but at 24% (or higher) they cannot afford to absorb the financing costs associated with storage. The OMCs who import and distribute fuel (KenolKobil, Shell, Total, etc) will stop extending credit to the Retailers. In essence, 'trading' will slow down to a crawl.

Bottomline: Price Controls are bad and selective Price Controls create rent-seeking. I expect to see fuel shortages as the norm in some areas serviced by small/independent Retailers as OMCs will not import more than they can sell through their own channels to cut financing costs. The 'distant' areas with mostly Independents will see a thriving black market in fuels.

Monday, November 21, 2011

Kenya & the rest of the EAC should stop wasting time (& taxpayer cash) on discussing a Monetary Union. It remains a WASTE of time (& taxpayer cash) in 2011, 2012, 2013 or 2014. IMHO, it will remain a waste long 2014! The only beneficiaries are the (taxpayer funded) academics, (taxpayer funded) government bureaucrats, (taxpayer funded) UN/EAC/World Bank/IMF officials & other so-called 'academics' who get grants or paid junkets to attend conferences on someone else's dime!

There are 5 members in the EAC:
Kenya
Tanzania
Uganda
Rwanda
Burundi

Potential Members:
South Sudan
Sudan
Ethiopia

Rwanda has done the most in the shortest possible time to integrate or become a true EAC citizen by opening up its borders to other EAC members. A progressive leadership knows Rwanda needs the EAC & is working hard to make it the place to be as a launching point into the EAC.

Kenya has the largest economy in the EAC & has done well compared to the others but it can (& needs to) do much more. At the minimum, the operations at the port in Mombasa and the border (Malaba, Namanga, etc) need improvement. A lot of it.

Uganda has done OK and even though it still 'fears' Kenya's economic weight, it has a renewed confidence after the confirmed discovery of 2 billion barrels of oil. The political bickering, corruption and decimation of the Constitution to allow Museveni a third term remains problematic.

Tanzania is a laggard. It has always been and will continue unless there is a HUGE shift in attitudes. I do not see any progress any time soon even though it can be EAC's powerhouse and surpass Kenya's economic might since it has lots of natural resources e.g. gold, natural gas, iron ore, coal, diamonds and lots more. There are huge rivers, plenty of arable land, a long coastline with many harbours and access to a huge hinterland including Zambia, Rwanda, Burundi, etc

Burundi is a poorly managed Rwanda. Not very consequential but its inclusion into EAC will benefit the region with an emphasis on stability.

My roadmap is simple...

Rwanda & Kenya need to 'open' up their borders/trade completely. There remain a few barriers. A joint Customs Union, with electronic paperwork, can benefit the transport of goods to/from Mombasa-Rwanda even though the physical route goes through an unstable Uganda. Kenya should not let Tanzania steal a march on this important trade route.

Uganda and Kenya need to fix/upgrade/build the railway between Mombasa & Kampala. Then to extend it to Hoima and Kigali.

Burundi needs to follow what Rwanda is doing. Not rocket science. Copy the good. Avoid the bad. Simple.

Fast-track South Sudan into the EAC. Kenya, Uganda & SS need to extend the railway north to Juba. Perhaps an integrated oil pipeline as well.

South Sudan needs to build a refinery. The geopolitics make it difficult but why export crude oil when the processing can be done in situ to create local jobs & opportunities.

Tanzania will plod along at its pace but there will some integration though much slower.

Ethiopia is a socialist country. Period. It will plod along but Kenya is the natural supply route for southern Ethiopia. It is a huge market/supplier for EAC's goods & services.

Sudan is just trying to upset the apple cart for South Sudan. The real market for Sudanese goods/services is South Sudan. Cordial relations with Ethiopia will help both countries. Not a real contender for the EAC.

Monetary Union? Forget it until the trade barriers are removed.

Political Union? Laughable till 2020. Kenya's constitition is untested. Uganda's constitutional Term Limit was shredded to bit. Tanzania is the only EAC country with 'tested' political stability. Rwanda's first change in the Presidency comes up in 2017. No idea about Burundi. South Sudan remains unstable. Ethiopia is a virtual dictatorship. (Arab/Muslim) Sudan will not allow a non-arab or non-muslim to be president/imam/sheik.

Fiscal Union? A pipe dream until "Open Trade" is implemented. We saw what happened in Europe where the Monetary Policy is managed by the ECB but Fiscal Policy was left with Greece, Italy & Spain.

Bottomline: No-one is giving up 'power' to someone else in the near future.

Sunday, November 20, 2011

No matter how nice Price Controls sound to the public, the truth is they will eventually fail. There may be a TEMPORARY solution for a pressing need during a severe calamity but Price Controls extract a massive cost to any economy if applied over an extended period of time.

The Government of Kenya (GoK) - in this case most of the populist but greedy/hypocritical legislators aka MPigs - in its usual moronic manner instituted Price Controls on fuels... Now the idiots who pushed for it are shocked that the Price Controls do not work...

Price Controls create Rent Seeking opportunities among those who have the power to control the supply/sale of these goods/services.

When an Oil Marketing Company (OMC) cannot earn a decent Rate of Return on its investment, it will minimize or stop its activities.

Some Kenyan banks are paying 25% for KES 50mn (or more) for 3-month deposits. Loans are cost a minimum of 25% p.a. therefore the incentive to 'invest' or 'trade' does not make sense for many OMCs.

My analysis is that many OMCs are bringing in the minimum amounts of fuel required to run their retail outlets to attempt to cover the minimum fixed costs. There is little incentive to take additional risks to import fuel to 'trade' thus Kenya will face a fuel shortage unless steps are taken to increase the margins allowed under the Price Controls.

Kenya has an INEFFECTIVE bureaucracy to monitor fuel adulteration which is how some of the OMCs stay in business.

Free Markets allow for many Sellers & Buyers. The first condition is being decimated under the current Price Control regime. The 'smaller' players who cannot internally finance the fuel imports are being driven out of business.

Kenya's largest OMC by volume (Total Kenya) reported a loss for 3Q 2011 on its fuel operations. The only other OMC that publishes its results is KenolKobil which has a regional network & extensive Trading Operations within Africa. It would not surprise me if some of the mid-sized & smaller OMCs close up shop in 2012 if the Price Controls (which squeeze the margins) remain in place.

I am certain many of the petrol stations adulterate the fuel:

- Kerosene/AGO's specific gravity is similar to Diesel's thus some stations would mix (tax-free) kerosene into diesel. Good for sellers. Bad for buyers.
- Regular petrol mixed in Super petrol then sold as Super/Premium. Good for sellers. Bad for buyers.

This is a complex topic but the simple message is that Price Controls do not work.

I am sure corruption was involved & of any of the property owners engaged in bribing officials of the municipality then they deserved the fate that befell them. Nevertheless, I have a feeling there were amny innocent victims too.

Sunday, November 13, 2011

Read the above sensible article by the sensible Carol Musyoka who discusses the financial decision/s & implications of Buy vs Rent. Now that interest rates in Kenya are 22% or higher (vs 14% 6 months ago) the problems will only get worse as many Buyers who borrowed will default in 2012 as they can't keep up with payments.

Or how about these houses demolished in Syokimau in Nov 2011 when the poor folks were told all was OK. They were given permission to build & then this...

The folks who were building in Syokimau were not politically connected crooks like naushad merali or gideon moi but Kenyans who thought they had a clean "Right" to the land.

I do not condone violence but if these residents picked up a gun & put a few bullets into those who sold them the land, approved the building plans & lied about the flights' path... I would simply look away...

Rwanda has a Electronic Registry for Land. It covers Kigali and is expected to cover all of Rwanda by Dec 2012. This is a country that was devastated in 1994 but have done so much to improve the processes that create good National Institutions.

Thursday, November 10, 2011

Globalisation...!
[Kenya's whole district thing is too new for me so I will use provinces coz easier to remember!]

Kenya's Athi River Mining (ARM) does not have a cement plant in the town of Athi River but one in Kaloleni, Kilifi District, Coast Province. ARM is building a huge plant in Tanga, Tanzania & will also use it to supply Kenya.

Uganda's Tororo Cement owns Mombasa Cement but the plant is not located anywhere near Mombasa (Coast Province) but in the town/district of Athi River.

These firms are typically controlled by a few shareholders but often have a majority shareholder often through proxies. An interesting tidbit is that these firms are often poor performers but have lots of deals with Related Parties.

Hah... so let me leave it open to my readers to tell me which ones they think fit the mold?

An interesting but growing part of the Export Market comprises Intermediate Goods which includes chemicals, plastic products, building materials, etc. These are products Kenya imports as Raw Materials (or components) then re-exports as finished goods primarily to East Africa.

Finally, Kenya has significant forex income through Tourism, Remittances & export of Services.

2011 has seen high oil prices that sucked the air out of Kenya's forex outflows. According to the WB, the Petroleum Imports were higher than net exports. And the Kenya Shilling (KES) paid the price.

The confluence of high oil prices, failure of rains & global economic turmoil resulted in a rapid increase in inflation which has placed Kenya on the edge of a knife going into 2012. Not all is doom & gloom but care must be taken.

At some point Kenyans need to stop and think what needs to be done. Yes, the politicians in Kenya have generally failed Kenyans but they are a microcosm of Kenyan society. After all most politician were (fairly) elected by Kenyans. I am not going to comment on the 2007 elections except there were no political losers.

Kenya has to look and adopt policies that have succeeded in other countries. I am not suggesting wholesale adoption but selected adoption of what has driven Asian countries forward.

Singapore - Few natural resources but a great harbor which they have fully exploited. Kenya has Mombasa/Kilindini which can be expanded & improved. And privatized despite political meddling by a bunch of corrupt politicians.

India - As 3rd world as it gets. Yet 1st world in many respects. India has technology Kenya can implement due to the 'price' factor. India's technology in many areas may not be high-tech but ideal for Kenya especially in Agriculture & small-scale manufacturing.

China - Kenya needs to learn how to build from the Chinese. They work on building roads in Kenya day & night which means more is done in less time!

Pakistan - It may not be as glamorous as its neighbour, India, but it faces similar problems as Kenya does. Nevertheless, it has managed to churn out some decent firms as well as innovate in various sectors in including farming.

Rwanda - OK, not an Asian country but what a country. Discipline, Transparency & Efficiency. Kenya needs to adopt "UMUGANDA" which is community service once a month by ALL able-bodied citizens. No exceptions except for the ill or disabled. President to Peasant.

I am of a Libertarian bent which means I am a Fiscal Conservative & a Social Liberal. I don't care what you do in your private life as long as you don't expect or have me pay for it!

The Bugbear is 2012's General Elections. Kenyans will pay a heavy price as the country comes to a standstill. Kenyans love elections. I think it is stupid for a country to be paralyzed just because we have elections. Folks in the USA work on on the even of Election Day, on Election Day and the day after. In Kenya, Election Day is often a holiday and often the day after.

If Kenya does not;

get sufficient rains in 2012

maintain peace in the major agricultural regions

maintain a stable economic environment

get the Fiscal Policy on track

maintain a tight Monetary Policy

keep al-shabaab & friends in check

then 2012 is going to be very difficult for Kenyans. Whoever becomes the President will have a tough time getting Kenya back on its feet in 2013.

Do I sound pessimistic? Yes.

(Partial) Solutions

Privatize but TRANSPARENTLY. Let me repeat. TRANSPARENTLY. No matter what politicians say, the Business of Government is not Business.

Support agriculture development. Not by providing subsidies but better roads from farms to towns, easier market access by simplifying licensing of agro-producers, introduce new & better crops. I would even venture many of these roads should be Public-Private Ventures.

Kenya has to encourage its local manufacturing firms to stay put. Expand when & where possible. No subsidies but a better environment including easier access to financing & better courts dedicated to business matters.

Export, export, export. Kenya cannot compete against China or India in many markets but East Africa (esp the hinterland) is Kenya's oyster. The hinterland extends all the way to DRC, Sudan & Ethiopia.

Reforms - Judiciary, Civil Service, Education. I believe Education should be privatized though heavily supervised/policed to keep out charlatans. Citizens should get vouchers they can use to shop around. Misuse or fraud should be severely punished.

Re-negotiate Trade treaties - Many countries subsidize their industries directly & indirectly. This has to be countered or we will kill off local industries. Egypt is a notorious COMESA partner which exports to Kenya what they import!

Security - Not a cheap endeavor but a safe country means more citizens will be out & about everywhere. No-one should feel unsafe not matter what ethnicity anywhere. Transporters should work 24/7 to improve utilization rates of infrastructure. Shops, hotels, airports, ports, offices can all run 24/7 for those who need the services. Rwanda is an attractive destination since it is considered 'safe' especially Kigali when compared to Nairobi.

The above solutions are relatively easy to attain but they require an engaged citizenry not the current 'tunaomba serikali' nonsense!

2012 will be a tough year but if Kenya starts down the path of sustainable development, folks will sit up & take notice. They will choose to invest in Kenya which is a small but important step going into 2013.